Reviewing GM's financial information in GM Exhibit 1 and its stock price in GM Exhibit 2, when do you first see signs of GM's impending financial distress? In referencing professional standards, what factors should auditors consider in evaluating potential going-concern uncertainties? Using you responses above, do you beleive that the going-concern uncertainty was warranted? Do you beleive that Deloitte & Touche should have issued a going-concern opinion prior to 2008? GM: Running on Empty?Founded in 1908, General Motors Corp. (GM) is truly an iconic American corporation. From 1931 through 2008, GM was the world'slargest automobile manufacturer, and in 1955, it became the first company in any industry to report more than $1 billion in revenues.GM's market share peaked at 51 percent in 1962. GM's domination in the market was such that many recommended the company besubject to scrutiny under antitrust laws. In 1971, former President Lyndon Johnson made the statement "now what's good for GeneralMotors really is good for America."1GM's net income reached an all-time high of $6.7 billion in 1997, and the automaker continued to generate positive net income through2004. In 2005, things began to change. GM reported a net loss of more than $10 billion and continued to post losses through 2008, witha loss of almost $31 billion in that year. (GM's cash flow from operations in 2008 was a negative $12 billion.) A summary of variousmeasures of GM's financial condition for the six-year period from 2003 through 2008 is presented in GM Exhibit 1.²GM EXHIBIT 1 Summary of Financial Information: General Motors Corp. (amounts in millions)200320042005200620072008Total assets$448,507 $479,603 $476,078 $186,192 $148,883 $91,047Stockholders' equity25,268 27,72614,597(5,441) (37,094) (86,154)Revenues182,543 193,571 192,605207,349 181,112 148,979Operating income2,862 12,081 (16,931)(7,668) (4,390) (21,284)Net income3,8222,805 (10,567)(1,978) (38,732) (30,860)7,731 (12,065)7,60013,061 (16,856) (11,759)Cash flow from operationsSource: General Motors Corp. 2003-2008 10-K reports.Because of concerns with the ultimate impact of GM's financial struggles on the world economy, GM received $13.4 billion ingovernment loans in December 2008. President Barack Obama's administration pledged interim financing to allow GM to develop arestructuring plan, requested then-CEO Rick Wagoner to resign, and announced a plan to replace at least 6 of the 12 members of GM'sboard of directors. All of these events occurred in a market in which the economic conditions sharply decreased demand for automobilepurchases. Not surprisingly, GM's stock reached a low (at that time) of $0.75 per share on May 29, 2009 (for comparison, GM's stocktraded between $27 per share and $94 per share from 1983 to 2004). GM's high, low, and closing stock prices for the period 2003-2008are summarized in GM Exhibit 2. GM EXHIBIT 2 Annual High, Low, and Closing Stock Prices: General Motors Corp.$60.00$50.00$40.00$30.00CloseHigh$20.00Low$10.00$0.00200320042005200620072008Source: Wharton Research Data Services.In its March 4, 2009, report on GM's financial statements, GM's auditors (Deloitte & Touche) concluded that GM's financial statementswere fairly presented in conformity with GAAP. However, Deloitte expanded its report to include the following paragraph torecognize uncertainties regarding GM's ability to continue as a going concern:Page C12The accompanying consolidated financial statements for the year ended December 31, 2008, have been prepared assuming that theCorporation [GM] will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation'srecurring losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its obligations and sustain itsoperations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are alsodiscussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.GM'S REORGANIZATIONIn April 2009, GM's Chief Executive Officer Frederick "Fritz" Henderson (who succeeded Rick Wagoner) created a restructuring plan tosave GM. Under this plan, the debt owed to unsecured bondholders, the United Auto Workers, and the U.S. government (which totaled$74.4 billion across the three groups) would be reduced by $44.6 billion in exchange for a 99 percent interest in the emerging company. Inaddition, the terms of this plan called for the closure of 42 percent of GM's dealers.3On June 1, 2009, the once unthinkable happened: GM filed for Chapter 11 bankruptcy. Under the terms of the bankruptcy plan, twoentities were created: an "old GM" (subsequently named Motors Liquidation Company), a public company that owns four brands in theprocess of being phased out (Hummer, Saab, Pontiac, and Saturn), and a "new GM," a private company that is majority owned by theU.S. government (a 60 percent stake), with the Canadian government (11.7 percent), United Auto Workers (17.5 percent), and GM'sunsecured bondholders (10 percent) owning large minority stakes. The new GM (known as General Motors Co.) received the Buick,Cadillac, Chevrolet, and GMC brands. General Motors Co. emerged from bankruptcy and began its operations on July 10, 2009, just 40days after the filing. A brief profile of GM (the combined entity prebankruptcy) and General Motors Co. (the new GM that emergedpostbankruptcy) is shown in GM Exhibit 3.4

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FINANCIAL ACCOUNTING

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ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Reviewing GM's financial information in GM Exhibit 1 and its stock price in GM Exhibit 2, when do you first see signs of GM's impending financial distress? In referencing professional standards, what factors should auditors consider in evaluating potential going-concern uncertainties? Using you responses above, do you beleive that the going-concern uncertainty was warranted? Do you beleive that Deloitte & Touche should have issued a going-concern opinion prior to 2008?

GM: Running on Empty?
Founded in 1908, General Motors Corp. (GM) is truly an iconic American corporation. From 1931 through 2008, GM was the world's
largest automobile manufacturer, and in 1955, it became the first company in any industry to report more than $1 billion in revenues.
GM's market share peaked at 51 percent in 1962. GM's domination in the market was such that many recommended the company be
subject to scrutiny under antitrust laws. In 1971, former President Lyndon Johnson made the statement "now what's good for General
Motors really is good for America."1
GM's net income reached an all-time high of $6.7 billion in 1997, and the automaker continued to generate positive net income through
2004. In 2005, things began to change. GM reported a net loss of more than $10 billion and continued to post losses through 2008, with
a loss of almost $31 billion in that year. (GM's cash flow from operations in 2008 was a negative $12 billion.) A summary of various
measures of GM's financial condition for the six-year period from 2003 through 2008 is presented in GM Exhibit 1.²
GM EXHIBIT 1 Summary of Financial Information: General Motors Corp. (amounts in millions)
2003
2004
2005
2006
2007
2008
Total assets
$448,507 $479,603 $476,078 $186,192 $148,883 $91,047
Stockholders' equity
25,268 27,726
14,597
(5,441) (37,094) (86,154)
Revenues
182,543 193,571 192,605
207,349 181,112 148,979
Operating income
2,862 12,081 (16,931)
(7,668) (4,390) (21,284)
Net income
3,822
2,805 (10,567)
(1,978) (38,732) (30,860)
7,731 (12,065)
7,600
13,061 (16,856) (11,759)
Cash flow from operations
Source: General Motors Corp. 2003-2008 10-K reports.
Because of concerns with the ultimate impact of GM's financial struggles on the world economy, GM received $13.4 billion in
government loans in December 2008. President Barack Obama's administration pledged interim financing to allow GM to develop a
restructuring plan, requested then-CEO Rick Wagoner to resign, and announced a plan to replace at least 6 of the 12 members of GM's
board of directors. All of these events occurred in a market in which the economic conditions sharply decreased demand for automobile
purchases. Not surprisingly, GM's stock reached a low (at that time) of $0.75 per share on May 29, 2009 (for comparison, GM's stock
traded between $27 per share and $94 per share from 1983 to 2004). GM's high, low, and closing stock prices for the period 2003-2008
are summarized in GM Exhibit 2.

Transcribed Image Text:GM EXHIBIT 2 Annual High, Low, and Closing Stock Prices: General Motors Corp. $60.00 $50.00 $40.00 $30.00 Close High $20.00 Low $10.00 $0.00 2003 2004 2005 2006 2007 2008 Source: Wharton Research Data Services. In its March 4, 2009, report on GM's financial statements, GM's auditors (Deloitte & Touche) concluded that GM's financial statements were fairly presented in conformity with GAAP. However, Deloitte expanded its report to include the following paragraph to recognize uncertainties regarding GM's ability to continue as a going concern: Page C12 The accompanying consolidated financial statements for the year ended December 31, 2008, have been prepared assuming that the Corporation [GM] will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Corporation's recurring losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. GM'S REORGANIZATION In April 2009, GM's Chief Executive Officer Frederick "Fritz" Henderson (who succeeded Rick Wagoner) created a restructuring plan to save GM. Under this plan, the debt owed to unsecured bondholders, the United Auto Workers, and the U.S. government (which totaled $74.4 billion across the three groups) would be reduced by $44.6 billion in exchange for a 99 percent interest in the emerging company. In addition, the terms of this plan called for the closure of 42 percent of GM's dealers.3 On June 1, 2009, the once unthinkable happened: GM filed for Chapter 11 bankruptcy. Under the terms of the bankruptcy plan, two entities were created: an "old GM" (subsequently named Motors Liquidation Company), a public company that owns four brands in the process of being phased out (Hummer, Saab, Pontiac, and Saturn), and a "new GM," a private company that is majority owned by the U.S. government (a 60 percent stake), with the Canadian government (11.7 percent), United Auto Workers (17.5 percent), and GM's unsecured bondholders (10 percent) owning large minority stakes. The new GM (known as General Motors Co.) received the Buick, Cadillac, Chevrolet, and GMC brands. General Motors Co. emerged from bankruptcy and began its operations on July 10, 2009, just 40 days after the filing. A brief profile of GM (the combined entity prebankruptcy) and General Motors Co. (the new GM that emerged postbankruptcy) is shown in GM Exhibit 3.4

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